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Economic Crises Case Study

Sub-Prime Crisis: Will Chinese Dragon be impinged similar to US economy?

Publication Year : 2010

Authors: S Chaudhuri and S Nath

Industry: Banking, Insurance and Financial Services

Region:China, US

Case Code: ECC0051IRC

Teaching Note: Not Available

Structured Assignment: Not Available

Abstract: Due to a high growth rate, China had been attracting a lot of investment in the property market since 2002. However, after posting double-digit growth for 2006 and 2007, the real-estate markets in China began to slow down in 2007. It was anticipated that the property bubble would burst in China as the property prices were increasing and the property analysts predicted a debt crisis if the projects failed to sell and the developers defaulted. However, the majority of the analysts opined that the chances of sub-prime crisis were bleak because of the mounting interest rates and government back-up in the form of capital injections and debt equity swaps. It thus remained to be seen whether the sub-prime cataclysm that affected the US would follow the same suit in China? This case is intended for MBA / banking students and is designed to be part of the financial management / management of financial institutions curriculum.

Pedagogical Objectives:

To conceptualise the underlying reason and the consequence of the sub-prime crisis in the US.

To understand the difference between the lending models of the US and China.

To analyse the intrinsic risks of the Chinese lending model and the probability of crisis in the country.